Brazil

Are construction contracts for projects developed in your jurisdiction required to be governed by local law? Are foreign choice-of-law clauses enforceable in contracts for construction projects developed in your jurisdiction?

There is a certain flexibility related to the election of the applicable law, particularly, if the parties choose arbitration rather than the local courts to solve their disputes. The arbitrator’s decisions can follow foreign law and even ex aequo et bonoprinciples, as long as they do not violate the national public order. If the parties choose the local courts, the state judges are likely to disregard the parties’ choice of a foreign law and apply national regulations.

Construction contracts are regular agreements ruled by the Brazilian Civil Code, which does not require any sort of formality but the parties’ signature. Although it is not mandatory, it is convenient to collect signatures from two unrelated witnesses, in order to turn the construction contract into an extrajudicial title.

Are contractors entitled to impose mechanics’ or similar liens on work performed in order to secure payment in your jurisdiction? Are lien waivers from contractors and subcontractors enforceable in your jurisdiction? Are these commonly used in your jurisdiction? Can payments to contractors be contingent on receipt of lien waivers?

These sorts of mechanisms are uncommon in infrastructure projects, as contractors usually impose no liens against the owners, mostly for cultural. Liens could be implemented, but they always tend to be disregarded for competitive reasons. In the real estate market, however, construction companies often keep possession of the buildings until a certain amount of price is paid.

Are there any strict liabilities that extend to owners of construction projects in your jurisdiction?

There are usually a few concerns that owners should have while negotiating construction agreements and also while managing its execution or performance.

Environmental issues are likely to impact on all construction players; however, if environmental damages are underwent throughout the works for the contractor’s fault, the owner shall be held liable before the public authorities, thus being subject to penalties, indemnification’s and reparations. Subsequently, the owner may seek proportional reimbursement from the contractor.

As per labour issues, the owner should negotiate protective clauses and be very attentive to the contractor’s assiduity in paying its payroll, as employees may file lawsuits claiming all parties involved in case labour rights are violated.

Tax responsibilities related to the contractor may also climb up to the owner, particularly those related to social security rights. In this case, contractual clauses (eg, right of retention) may also protect the owner against contractor’s potential default.

Do owners typically negotiate a full pass-through of liabilities from their revenue contracts to contractors?

Back-to-back clauses are common in the Brazilian scenario, but they used to be narrowed down to a few provisions, as contractors are not always willing to hold the risk of the whole enterprise, as their activities are limited to construction per se.

On the other hand, in times of economic crises, not only investors tend to be more careful in terms of risk taking, but also contractors are more likely to broaden their scopes and undertake more responsibilities, in order to keep their engines running. For this reason, in the past couple of years, pass-through principles seemed to have gained space in the construction market, with fewer limitations than Brazilian contractors used to impose.

What are the most common pricing modalities in your jurisdiction? Is one modality more prevalent in certain types of projects than others?

Lump-sum agreements are by far the most frequently used modality, especially in less sophisticated enterprises. Other sorts of agreements are also very familiar to the Brazilian market, such as EPC, cost plus, GMP (cost plus – guaranteed maximum price) and other FIDIC tropicalised variations. Alliance Agreements have also been executed mostly by major companies in very sophisticated infrastructure projects, but they have not yet taken off in the Brazilian jurisdiction, as some of their concepts were not perfectly applied by the operators, causing difficulties to the partners as they seem to be reluctant to change their EPC mentality.

What are the key approvals and permits required for a construction project? What is the typical cost and timing to obtain or fulfil such approvals, permits and obligations for large-scale infrastructure projects in your jurisdiction?

Approvals and permits may vary according to the municipality, as each town may have its particular requirements for construction projects. In general, however, the municipalities tend to require construction approval certificate, construction execution certificate and, after completion, occupancy certificate. Buildings and infrastructure projects in general also require certification from the fire department, and all projects of such nature shall appoint a responsible engineer, who shall obtain before the competent technical institution (CREA) its registration attesting its technical responsibility for that particular project.

Perhaps even more importantly, the parties must obtain environmental licenses, which may take a long time to be issued, depending on the complexity and the area where the construction will be held. The parties shall submit studies to the authorities, and may only start civil works after obtaining the installation licence.

Are subsurface conditions a common source of delays for construction projects in your jurisdiction? Do the laws of your jurisdiction permit the parties to freely allocate this risk contractually?

Yes it is. Depending on the region and on the type of infrastructure being built, notwithstanding the quality of geological surveys, the parties often face difficulties in dealing with geological risks. This is why the Brazilian Civil Code grants the contractor the right to stop the works in case the owner is not willing to rebalance the contract, despite the increase in costs for unforeseen geological difficulties.

As a matter of fact, severe problems of such nature have been noticed when a great number of small hydroelectric power plants were being implemented between 2000 and 2010. For this reason, the parties tend to be very careful while allocating geological risks, as the parties are free to negotiate clauses in this regard.

Does your jurisdiction provide statutory protection for ‘unforeseeable’ or similar risks? Do such statutory protections supersede contractual allocations of risk?

Brazilian jurisdiction does provide statutory protection for ‘unforeseeable’ or similar risks, which can be derogated or further negotiated by the parties. Article 393 of the Brazilian Civil Code exempts the parties from default in case of force majeure. Article 478 also entitles the party to terminate the agreement if it suffers extreme impact of an unpredictable and extraordinary event, which would also bring extreme advantage to the other party.

Will the laws of your jurisdiction strictly interpret contractual provisions granting cost or schedule relief? Or is there flexibility to arrive at ‘equitable’ solutions even if contrary to contractual provisions? Are there any specific rules in your jurisdiction regarding the evidence required to support cost or schedule relief claims?

In general the contract provisions tend be strictly interpreted (pacta sunt servanda), but in extreme cases a more equitable solution is likely to prevail. Delay penalties, for example, may be reduced by the courts to provide a greater level of fairness to the contract (Brazilian Civil Code, article 413).

Relieves are commonly granted in case one of the parties’ defaults prevents the other from carrying out works. As standard principles, the Brazilian Civil Code does not rule specifically on the exact evidences that are required to support cost or schedule relief claims, therefore it is recommendable that the parties negotiate the terms so as to bring clearer parameters to their contractual relationship.

In relation to public contracts, cost and schedule relief may be accepted in the following cases: (i) project modification or specification changes, (ii) unpredicted and exceptional events, (iii) disruption caused by the owner, (iv) increase of quantities, (v) obstruction caused by third parties and (vi) owner default.

Does your jurisdiction recognise economic equilibrium clauses? Have any such clauses been utilised in practice?

Not only are equilibrium clauses accepted in the Brazilian jurisdiction and can be freely negotiated, but also the law itself rules on the circumstances where rebalance is admissible. As per private projects, article 478 of the Brazilian Civil Code determines the right of termination, in case one of the parties undergoes extreme impacts derived from extraordinary and unpredictable events, which also bring extreme advantage to the unaffected party. Article 479, however, allows the unaffected party to avoid termination if it accepts to equitably modify the contract conditions. Article 480 goes even further, allowing the affected party to impose a modification (scope reduction, for example) in case it undertakes excessive burden.

Despite the legal provisions above, Brazilian law is still considered to be laconic in relation to economic equilibrium mechanisms. For this reason, it is recommended that the parties negotiate specific hardship clauses with customised equilibrium provisions.

How significant is the impact of labour unions on construction projects in your jurisdiction?

Labour unions play a very strong role in the Brazilian market, notably, in the construction segment. In addition to CLT (Brazilian Labour Code), the parties should be alert to Collective Agreements and Convention, which can be directly executed by the unions on regional basis, causing impacts in terms of salaries, benefits and so on. Such agreements must be attentively considered by the parties whilst negotiating contract price, as it may affect directly the costs of the project.

Additionally, Brazil has an enormous amount of specific trade unions. For one single project, for example, more than four different trade unions may have to be involved (assembly, civil construction, earthworks, etc). Therefore, depending on the activities performed during the works, it is important that the contractor makes contact and engage the appropriate entities, in order to avoid discussions as to which union should be the one responsible the employees.

Highlight any significant public procurement law provisions applicable to public construction project tenders.

The most relevant legislation related to public procurement applicable to construction contracts are: Law 8.666/1993 (Public Procurement Law), Law 8.987/1995 (Concession Law), Law 11.079/2004 (Public-Private Partnership), Law 12.462/2001 (RDC – Special Regime for Public Procurement).

Do contractors commonly carry out construction activities through consortia or other types of joint ventures? Under these arrangements in your jurisdiction, are joint venture partners jointly and severally liable for their obligations?

Consortia and other types of joint ventures are legal structures commonly used by contractors not only while participating in public biddings but also in private works. Consortium agreements engaged by private parties do not make them jointly/severally liable for their obligations unless stated otherwise in their by-laws according to article 278, first paragraph, of the Brazilian Joint-Stock Company Law. However, if the consortium or joint venture is contracted by the Public Administration, then joint liability is mandatory, pursuant to article 33, item V, of Law No. 8.666/1993.

Are time-bar clauses for claims enforceable in your jurisdiction? Do courts in your jurisdiction interpret these provisions strictly?

According to Brazilian law, there is a difference between being entitled to a right and being entitled to a claim resulting from a violation of such right. Regarding the former, the parties may agree to a clause determining a time period to exercise the right. Regarding the latter, the time periods are mandatory and cannot be modified by the parties’ agreement. Because it is a mandatory law, courts interpret these provisions strictly, in consonance with articles 192 and 211 of the Brazilian Civil Code.

Are limitations of liability enforceable in your jurisdiction? What are the exclusions for such limitations?

Limitation of liability is only enforceable in private agreements. Any provision of this kind involving public contracts is null and void.

The limitation of liability clause in private agreements may be disregarded in case of gross negligence and wilful misconduct. Note, however, that the concept of gross negligence is not established by the Law, and is only considered by doctrine and case law (jurisprudence).

The lack of regulation and legal definition, in addition to the Brazilian court’s parsimony in attesting gross negligence in construction disputes, can impose difficulties in the application of such concept. This is why it is very recommendable that the parties negotiate and insert a well-defined description of gross negligence in their contracts, in order to restrict further discussions whenever a dispute arises.

Exclusive remedy clauses, although uncommon in Brazil are likely to be enforceable (pacta sunt servanda), as long as they do not go against public order principles and provisions. This sort of clauses should also be treated carefully so as not to be considered abusive. As an example, although liquidated damages per se are not properly considered as exclusive remedy, it is a fact that, whenever such a clause is settled in an agreement, they only solution granted to the innocent party in case of breach is to be compensated by applying such provision.

Are liquidated damage provisions enforceable in your jurisdiction? Are there any limitations on the formulation of such liquidated damages? Does local law allow courts in your jurisdiction to reduce the amount of liquidated damages provided in a construction contract?

Liquidated damage provisions are enforceable under Brazilian law but there are some limitations. According to article 412 of Brazilian Civil Code, liquidated damages shall not exceed the amount of the obligor’s main obligation. Also, article 413 allows the judge or the arbitrator to reduce the amount of the liquidated damages when it is excessively high or when the obligation has been partially performed.

How is force majeure governed in your jurisdiction? Are carve outs to general force majeure provisions provided by law enforceable?

Article 393, sole paragraph, of the Brazilian Civil Code relates to force majeure as all unavoidable and unforeseeable events, which impacts exempt the debtor from its obligation. According to Brazilian law, the parties are free to negotiate force majeure clauses, carving out general principles or provisions at their own convenience.

What instruments are typically used as performance security in your jurisdiction? Are such instruments liquid?

The two most commonly used instruments are insurances (performance bond) and bank guarantees. Performance bonds provided by insurance companies are not as liquid as bank guarantees, as the insurer needs to be notified of the damages incurred in order to evaluate them before deciding whether or not to indemnify the beneficiary. Bank guarantees, on the other hand, are a first demand bond, which can be paid immediately after its presentation in the bank.

How is concurrent delay in construction projects treated in your jurisdiction?

Article 945 of the Brazilian Civil Code states that in case of concurrence, the compensation of the aggrieved party would take into account both parties’ degree of culpability. Thus, regarding concurrent delay in construction projects, a time compensation scheme may take place, while preserving the economic equilibrium of the contract.

Does your jurisdiction recognise degrees of negligence and culpability?

Brazilian law does recognise degrees of negligence and culpability. Articles 944, sole paragraph, and 945 of the Brazilian Civil Code provide that the amount of compensation may be reduced in cases of minor negligence. As the concept of gross negligence, however, is not established by law, doctrine and case law are inclined to consider it as wilful misconduct.

Is there a distinction in your jurisdiction between consequential losses and those resulting ‘naturally’ from a breach of contract?

According to article 944 of the Brazilian Civil Code, the compensation shall be determined in view of the proportion of damages incurred, and, in this regard, article 402 provides that the concept of damages shall comprehend not just effective losses but also loss of profits.

Being those considered direct damages, it is certain that they shall be compensated if they are caused by the breach of contract. Scholars also affirm that consequential losses may be subject to compensation if decisively caused by the breach of contract.

Are there mandatory provisions in connection with the transfer of title of works or materials delivered in your jurisdiction?

There are no mandatory provisions determined by law with regards to the transfer of title of works or materials. The parties tend to negotiate the mechanisms on how these procedures should be conducted among them.

Must a contractor fulfil specific requirements when presenting an application for payment in your jurisdiction? What is the maximum time provided by law to pay an invoice from a contractor? Do local laws allow owners to make set-offs, deductions, withholdings or retentions from payments due to contractors, and are there any limitations on the circumstances in which owners can exercise these rights?

Brazilian law does not make any specific requirement for presenting application for payment, and neither defines a minimum or maximum period for payment to be done, which entitles the parties to freely negotiate on this regard.

The parties are also free to negotiate compensation clauses, as local law does allow the parties to make set-offs, deductions, retentions and so on. In fact, retention clauses are very common in Brazil, as way to assure the fulfilment of obligations.

Must insurance policies for construction projects in your jurisdiction be placed with local insurers? Are there restrictions in your jurisdiction regarding the payment of insurance proceeds offshore or to third parties?

In general, insurance policies for construction projects must be placed with local insurers, as states article 19 of Complementary Law No. 126/2007. However, article 20 of the same Complementary Law, alongside article 6 of Brazilian’s National Council of Private Insurances (CNSP) resolution No. 197/2008, allows legal entities domiciled in Brazil to place insurance policies with foreign insurances as long as there is no offer in Brazil and no legal infringement.

According to Central Bank of Brazil Resolution No. 3.691/2013, there are no restrictions regarding the payment of insurance proceeds offshore. Third parties such as lenders may be entitled to the insurance proceeds as long as they are included as obligee in the policy.

Briefly describe the tax regime applicable to construction projects. Are withholding and value added taxes applicable? Are construction contracts typically structured so that onshore and offshore work are performed by separate contractors?

Regarding the tax regime applicable to construction projects, either actual profit method or deemed profited method may be applied. In both regimes, the most common taxes applicable are: corporate income tax (IRPJ), social contribution on net profits (CSLL), contribution to the social integration plan (PIS), contribution for social security financing (COFINS) and service tax (ISS). The main difference between them refers to the tax base: it will be the actual profit for the first regime and the deemed revenue for the latter. In any case, the first regime is mandatory when the company’s revenue is above 78 million reais in the previous fiscal year.

Also, withholding and value added taxes are both applicable. Onshore and offshore work should not necessarily be performed by separate contractors, it will depend on the convenience of the parties.

Are there any statutorily mandated or implied warranties under the laws of your jurisdiction? What is the minimum defect liability period in your jurisdiction? Are there specific minimum defect liability periods for certain types of works?

The warranty period under the Brazilian laws can be found in article 618 of Brazilian Civil Code, which explains that in construction contracts, the contractor is responsible, during the period of five years, for the soundness and safety of the works. The minimum defect liability period is the same for all types of works.

What is the statute of limitations for contractual and non-contractual claims in your jurisdiction?

Traditionally, the statute of limitations for contractual claims is 10 years (article 105 of Brazilian Civil Code), and three years for non-contractual claims (article 206, 3rd paragraph, item V, of the same Code).

Despite the traditional understanding above, the Brazilian Superior Tribunal of Justice (STJ) has recently issued a decision uniting both types of claims to one single period of three years, causing great commotion among scholars. Since the STJ’s decision, the statute of limitation for contractual claims has been the target of important controversy. The legal community; however, speculates that soon the subject will be settled by bringing the contractual claim back to its traditional 10-year statutory limitation period.

Describe any local arbitration institutions and any specialised construction law courts in your jurisdiction.

There are no specialised construction law courts in Brazil. Regarding arbitration, the most used chambers are: Chamber of Commerce Brazil-Canada, Chamber of de Conciliation, Mediation and Arbitration Ciesp/Fiesp, Chamber FGV of Mediation and Arbitration, Amcham-Brasil, CAMARB and ICC Brasil.

Are agreements to mediate enforceable? Are there any mandatory mediation provisions for construction contracts in your jurisdiction?

Brazil has recently sanctioned the Mediation Act (Law No. 13.140 of 2015), which allows the parties to enter into mediation agreements, including the Public Administration. Mediation, however, is not mandatory as the parties’ autonomy and free will tend to prevail, in case they opt to seek jurisdiction directly. Nevertheless, there still is a controversy whether a mediation clause could be overcome, so as to allow the parties skip the mediation procedure and move straight to the courts/arbitration.

How prevalent are dispute adjudication boards appointed by the parties in construction contracts in your jurisdiction? Are agreements to submit disputes to dispute adjudication boards enforceable?

Dispute adjudication boards are an incipient method of dispute resolution in Brazil. Nonetheless, even though they are not commonly used, there are important signs showing that mechanisms of such nature are about to blossom, as they have been well accepted in the academic forums and recently negotiated agreements. Although Brazilian law does not rule on the subject, it is understood that once the parties agree on submitting their disputes to dispute boards, they shall have to do it before moving on to arbitration or the courts.

Most recent trends affecting large-scale construction projects in Brazil relate to the public sector. Among them stands out the approval of Provisional Measure No. 752 on 25 November 2016, which brings general guidelines for the extension and reestablishment of concessions for public services in the road, rail and airport sectors of the Federal Public Administration. Also, alongside other innovations, this Provisional Measure gives express authorisation for the use of arbitration in place of the local or state court. Therefore, new investments in existing concessions in the transportation sector are expected to occur, which is going to affect and possibly increase the number of large-scale construction projects.